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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Risk Management

A broker's client buys shares on a T day under normal rolling settlement but does not pay the funds by the pay-in deadline. Which action is consistent with sound broker risk management practice?

The broker should recover the shortfall by selling or squaring off the client's holdings or positions in line with its risk policy and the client agreement. The broker stays responsible for settlement obligations to the clearing corporation, so increasing limits or shifting dues to another client would be improper.

  1. AIgnore the shortfall because the exchange will pay the broker's dues
  2. BSquaring off or selling the client's securities or positions as per the agreed risk policy to recover the duesCorrect
  3. CIncrease the client's trading limit to recover the loss through new trades
  4. DTransfer the client's shortfall to another client's ledger

Explanation

The broker remains liable to the clearing corporation for the pay-in. Hence it should act under its risk management policy and client agreement, such as liquidating positions or securities to recover dues. Raising limits increases risk and moving a shortfall to another client's ledger is improper.

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